Office rents are recovering, and these REITs could benefit.

TL;DR

• In 1Q22, Grade A office rents in the CBD saw the fastest pace of growth in the past year with increasing business confidence.
• As owners of some of the prime office assets in Singapore, Suntec REIT, Mapletree Commercial Trust (MCT) and Keppel REIT could benefit from the improvement in office rents.
• Amongst the 3, Keppel REIT has the highest exposure to Grade A office space in Singapore and also lowest gearing.
• MCT offers the highest dividend yield of 5.4%. Suntec REIT and Keppel REIT both offer dividend yields of 5.1%.

What happened?

With a recovery in economic growth and greater optimism about the future, companies in Singapore have been looking to expand once again. This might be why office rents for prime office space have staged a strong recovery.

According to property consulting firm JLL Singapore, Grade A office rents in the CBD saw its highest pace of growth in the past year, rising 2.3% to $10.46 per square foot (psf) per month in 1Q22 from $10.23 in 4Q21.

From a recent bottom of $9.79 per psf per month in 1Q21, rents have recovered by a whopping 6.9%!

This comes as companies have recognized that offices remain critical in a hybrid work arrangement.

As employees, most of us have also come to the realization that we are not going to be able to work-from-home forever!

What does this mean?

As owners of some of the prime office assets at Singapore’s CBD, Singapore real estate interest trusts (REITs) could benefit from the improvement in office rents.

 Here, we look at three commercial REITs that have a significant exposure to improving rental prospects in the office sector.

1. Suntec REIT

Suntec Real Estate Investment Trust, or Suntec REIT, is the owner of Suntec City, Singapore’s largest integrated commercial development, including one of Singapore’s largest shopping mall.

Office assets contribute about 82% of its net property income in the second half of 2021.

Apart from Suntec City, it also has a stake in One Raffles Quay and Marina Bay Financial Centre.

Outside of Singapore, it has commercial assets in Australia and the United Kingdom. 

Across the office properties in Singapore owned by Suntec REIT, committed occupancy  was at 97.5% as of December 2021, above the core CBD occupancy of 93.3%.

Suntec REIT also saw positive rent reversions of +3.2% in 2021 across its Singapore office portfolio.

Management of Suntec REIT expect a gradual rise in market rents for its Singapore office portfolio because of limited new supply.

However, they have tampered expectations on rent reversions due to the high expiry rents across its portfolio.

For example, the expiry rents in 2022 is at $9.31. This may make the rents it is able to renew these leases at appear not significantly higher than expiry rents.

2. Mapletree Commercial Trust (MCT)

Mapletree Commercial Trust, or MCT, is a Singapore-focused REIT with office and retail assets.

As of 30 September 2021, MCT’s portfolio comprised five properties in Singapore, of which four are located in the Greater South Waterfront and one in the CBD.

The prime asset that they own is VivoCity, Singapore’s largest mall. Other key assets include Mapletree Business City, an integrated office. business park and retail complex at Alexandra.

In the nine months through December 2021, Vivocity contributed 34% to MCT’s net property income (NPI). MBC contributed 45% to MCT’s NPI during the same period. 

As of December 2021, the committed occupancy across MCT’s portfolio was at 96.3%. This was relatively higher at MBC at 96.7%, and lower for mTower at 87.6%. 

In December 2021, MCT announced a proposed merger with Mapletree North Asia Commercial Trust to form a flagship commercial REIT.

If approved by shareholders, the combined entity to be renamed Mapletree Pan Asia Commercial Trust could leapfrog to be one the the top 10 largest REITs in Asia.

We discuss more about the proposed transaction and what it means for MCT in our article “Is Mapletree Commercial Trust set for regional greatness?”

3. Keppel REIT

Keppel REIT has a portfolio of Grade A commercial assets in key business districts across Asia.

In Singapore, its office portfolio would include a stake in Ocean Financial Centre, Marina Bay Financial Centre, One Raffles Quay and Keppel Bay Tower.

Outside of Singapore, it has assets in Australia and South Korea. 

In 2021, Singapore contributed 67% of its NPI. This was followed by South Korea, which contributed 29%. 

Across its entire portfolio, Keppel REIT has a committed occupancy of 95.4% as of December 2021.

The average signing rent for Keppel REIT’s Singapore office leases in 2021 was S$10.56, which is higher than the average expiring rents in 2022 of S$10.35.

What would Beansprout do?

• Keppel REIT has highest exposure to Grade A office assets in Singapore: Comparing the 3 REITs, Keppel REIT has the highest exposure to Grade A office space in Singapore. It is no wonder that it also has one of the highest total return year-to-date of 10.8%. There is also scope for it to see higher rental reversions for its office portfolio this year, as the average signing rent in 2021 was already higher than expiring rents this year. 
• Suntec REIT has highest gearing: Suntec REIT has the highest gearing ratio, as measured by debt over asset amongst the 3 REITs. Its gearing of 43.7% exceeds that of Keppel REIT (38.4%), and MCT (34.1%). MCT’s net gearing could increase to about 39.2% following the merger with MNACT.
• MCT offers highest dividend yield: Across the 3 REITs with exposure to Singapore office, MCT offers the highest dividend yield of 5.4%. Suntec REIT and Keppel REIT both offer dividend yields of 5.1%. The higher dividend yield of MCT is partly driven by its higher exposure to retail, which makes up more than ⅓ of its portfolio.

Interested in investing in the REITs but worried about how they might be impacted by higher interest rates? Check out our article What the US rate hike means for REITs.